Enron Banks Back on the Hot Seat

From Lerach Coughlin Corporate Governance Bulletin

December 19, 2006

In a dramatic new development in the Enron class action lawsuit, Barclays Bank has been brought back into the securities litigation by shareholders who allege that the British bank colluded in financial wrongdoings connected to the Houston energy giant's collapse. Judge Melinda Harmon issued an order which effectively reinstates Barclays as a defendant in the shareholders' claim, as well as rejected Merrill Lynch's renewed plea to be dismissed.

“This is a big victory for the defrauded Enron investors. It comes on the heels of submissions we made to the court regarding former Enron CFO Andrew Fastow's testimony about both Merrill Lynch and Barclays. We look forward to filing an amended complaint, which will detail how Barclays was a key participant in the Enron scheme to cheat shareholders in one of the largest corporate scandals in history, and to defeating the banks' summary judgment motions and going to trial in April 2007,” said lead plaintiff's lawyer, William S. Lerach.

Fastow recently divulged details of the fraud implicating Enron's investment banks to help defrauded Enron investors. Fastow, a defendant in the Enron class action, met with a team of attorneys for lead plaintiff The Regents of the University of California and provided sworn testimony implicating Enron's investment banks in the company's high profile financial scandal. Fastow's sworn testimony was made public and filed in a declaration with the court hearing the class action suit on September 26, 2006.

Fastow “named names of high-ranking Enron bank officials and provided a road map on a sham-deal by sham-deal basis of how the Enron banks actively participated in the creation of financial structures that were designed to deceive the markets, credit rating agencies and analysts – and cheat investors out of billions and billions of dollars. Fastow's sworn statements, which are corroborated by contemporaneous documents, directly implicate some of the world's largest banks in the Enron fraud,” said Lerach.

According to a statement issued by The Regents, “[t]he sworn testimony and primary documents reveal that, beginning as far back as 1996, the banks intentionally worked with Enron to falsify the company's financial statements and deceive investors through phony financial deals that were not legal and would not have been approved by regulators. Fastow's declaration – supported by internal E-mails and memoranda – also makes it very clear that, in many cases, Enron didn't tell these banks what to do – but just the reverse. It was the banks who told Enron how to deal with the company's significant financial challenges. When Enron had difficulty meeting its reported earnings targets and needed to generate more cash flow to maintain its credit ratings, the banks helped design the fraudulent and deceptive deals that led to the collapse of the company's stock and hurt tens of thousands of investors across the country.”

Fastow also gave testimony at a deposition in which he outlined the role of Enron's banks in falsifying Enron's reported financial condition. “We were changing how Enron appeared to the outside world,” he testified. Given Fastow's remarkable cooperation in providing testimony supporting defrauded Enron investors in this case, The Regents formally supported leniency towards Fastow at his criminal sentencing. The recovery to date in the Enron case stands at over $7.3 billion, and Fastow's testimony may significantly increase the probability of resolving the litigation against the remaining bank defendants, including Barclays, Merrill Lynch and Credit Suisse First Boston. Judge Harmon also recently preliminarily approved lead plaintiff's settlement with Arthur Andersen and law firm Kirkland & Ellis, who settled claims for $72.5 million and $13.5 million, respectively. These settlements with Andersen, now largely defunct, and with Kirkland & Ellis, who was dismissed from the action, are significant victories for former Enron investors. It should be noted that former Andersen auditors testified in the criminal trial of Kenneth Lay and Jeffrey Skilling and in the Enron class action, supporting the defrauded investors' claims, stating that the investment banks and Enron colluded in concealing information from Andersen in order to falsify Enron's balance sheets.

In re Enron Corp. Sec. Litig., No. H-01-3624 (S.D. Tex. 2001).